Sterling skids to $1.30 as inflation, Brexit cast doubt on August rate rise

LONDON (Reuters) - Sterling tumbled to 10-month lows against the dollar on Wednesday after data showed British inflation failed to rise as expected and Brexit-linked political turmoil pummelled the currency towards the $1.30 mark.

Annual consumer price inflation held steady in June at 2.4 percent - the bottom end of forecasts in a Reuters poll of economists who had expected to see the first increase this year, to 2.6 percent.

Market expectations for a 25 basis point August interest rate rise by the Bank of England fell back to 72 percent from close to 80 percent earlier this week.

The pound was already down before the inflation data on a rallying dollar and worries about British Prime Minister Theresa May’s ability to push through her Brexit plans after she only narrowly won a crucial parliamentary vote on Tuesday.

May threatened rebel lawmakers in her Conservative Party with a general election this summer if they defeated her Brexit plans on customs.

Trading at $1.3080 before the inflation numbers, sterling fell further to a low of $1.3010, its weakest since Sept. 5.

Against the euro the pound dropped 0.4 percent to 89.32 pence.

“Inflation in the UK has been created by the currency. There’s been no inflation created inside the UK”, Roberto Coronado, a portfolio manager at PineBridge Investments, told Reuters, referring to the depreciating pound’s impact on price rises.

“There no reason why the Bank of England should raise rates, so I think market expectations for a rise are too high.”

Britain’s FTSE extended gains to touch a session high after the data. British government bond futures surged by more than 30 ticks after the data and 10-year gilt yields dropped to their lowest since May 31.

DEEP DIVISIONS

May survived a crucial parliamentary vote on part of her Brexit proposals on Tuesday, but the vote was the latest in which May’s authority has been challenged and deep divisions within her own government laid bare.

She also saw off an attempt by pro-European Union rebels in her own party require the government to try to negotiate a customs union arrangement with the EU if, by Jan. 21, 2019, it had failed to negotiate a frictionless free trade deal with the bloc.

Markets and many investors want to see Britain retain close trade ties with the EU, possibly through a customs union, after Britain leaves the bloc in March 2019.

The political turmoil caused the pound to suffer its biggest one-day fall in more than two months. A dollar rally following bullish comments from Federal Reserve Chairman Jerome Powell also hurt sterling.

“It is becoming more obvious by the day that May is finding it increasingly difficult to gain a majority in parliament for ‘her’ Brexit plan,” Commerzbank analysts said.

Sterling tumbled two cents in the space of hours on Wednesday before the parliamentary vote.